NSE gave preferential access to some brokers: Govt

Moneylife Digital Team 10 December 2016

Investor Interest

As per the findings of a Securities and Exchange Board of India (SEBI) appointed Committee, National Stock Exchange (NSE) had given preferential access to some brokers to its co-location servers for algorithmic trading, says the union government.

In a written reply in the Lok Sabha, Arjun Meghwal, the Minister of State for Finance, says, "The architecture of NSE with respect to dissemination of tick-by-tick through transmission control protocol (TCP) or internet protocol (IP) was prone to manipulation or market abuse. And this system has been discontinued by NSE from 3 December 2016".

“Preferential access was given to stock broker(s), wherein it was possible for stock broker to log into multiple dissemination servers through multiple internet protocols assigned to him. It was also possible for a single member to have multiple logins to a single dissemination serve through multiple IPs assigned to it. It was observed that stock broker(s) had multiple advantages by logging in first or even second and third,” the Minister said quoting the SEBI report.

Earlier in October, NSE appointed Deloitte India to conduct a forensic audit of its algo trading system and examine allegations of unfair access to some brokers in algorithmic trading, as per media reports.

This appointment by NSE follows an order from the market regulator to NSE Chairman Ashok Chawla. The letter sent by SEBI on 9 September 2016, asked NSE to "immediately initiate an independent examination (including forensic investigation by an external agency) of all the concerns highlighted by the SEBI expert committee in its report alleging lack of process that allowed this to happen and collusion if any and fix accountability for the aforesaid breaches covering NSE and stock brokers, vendors and outsourced entities involved in the issue.” (Read: SEBI Finally Cracks down on NSE’s Suspect Algo Trading. What does it mean? )

Apart from a forensic investigation, the most significant punitive aspect of SEBI’s directive is that all revenue accruing from its co-location facilities, including from fibre connectivity between brokers’ co-location facilities and their offices must be paid into an escrow account. The NSE has been asked to get all concerns expressed by the committee addressed, and take necessary action, within three months.

According to the newspaper report, the forensic audit by Deloitte would cover NSE's co-location facility, algorithmic trading platform, brokers and vendors who access or are connected with NSE’s co-location facility. It will also examine allegations of collusion between NSE officials, vendors and brokers and gather evidence if any violations are found, two of the people told Live Mint.

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